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  • GAO Issues Report on TARP Housing Programs

    Federal Issues

    On January 11, the GAO announced the release of its report providing an update on the status and condition of Treasury’s TARP-funded housing programs as of October 31, 2016. According to the report, Treasury had disbursed nearly 60 percent or $22.6 billion of the $37.51 billion assigned to TARP for the purpose of helping struggling homeowners avoid foreclosure. The report also notes that the GAO’s latest review yielded no new recommendations and that only five of the 29 recommendations GAO has previously made related to the TARP-funded housing programs remain open or not fully implemented. The report states that the GAO will continue to monitor and assess the status of these recommendations.

    Federal Issues Mortgages Department of Treasury TARP GAO

  • GAO Report Evaluates "Permanent Funding Authorities"

    Federal Issues

    On December 9, the GAO released a report detailing the results of its audit of “permanent funding authorities”—a term it defines as “entities with authority to collect and obligate funds without further congressional action.” The report, entitled Permanent Funding Authorities: Some Selected Entities Should Review Financial Management, Oversight, and Transparency Policies: (i) describes the different types of authorities for entities funded by fines and penalties and for regulatory entities; (ii) assesses the policies and procedures related to agencies’ and other entities’ management of their permanent funding authorities; and (iii) makes recommendations to ensure efficient use of resources.

    In conducting its audit, the GAO examined five case studies that illustrate the variation in permanent funding authorities: the Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS); the CFPB; the DOJ’s Crime Victims Fund (CVF); the Gulf Coast Restoration Trust Fund (Trust Fund); and the Public Company Accounting Oversight Board (PCAOB), overseen by the SEC. Based on its review, the GAO recommended that in order to “ensure efficient resource use,” APHIS, the CFPB, and the SEC—in its oversight of PCAOB—should review reserve targets. To facilitate oversight, the SEC should establish time frames for PCAOB’s annual report. According to the report, the Department of Agriculture, CFPB, PCAOB, and SEC agreed with GAO’s recommendations.

    Federal Issues CFPB SEC DOJ GAO CVF APHIS Trust Fund PCAOB Department of Agriculture

  • GAO Issues Report on Compliance with the SCRA Interest Rate Cap by Student Loan Servicers

    Federal Issues

    On November 18, the GAO announced the release of its report and recommendations following the watchdog agency’s review of application of the SCRA’s rate cap by student loan servicers. According to the report, entitled Student Loans: Oversight of Servicemembers' Interest Rate Cap Could Be Strengthened, the number of servicemembers receiving the interest rate cap for their student loans has greatly increased since the Department of Education began requiring federal student loan servicers to automatically check the Department of Defense’s SCRA database to identify those who are eligible.

    The report also identified several challenges commonly encountered by servicemembers seeking to take advantage of the rate cap, including:  (i) inaccurate SCRA information from the database; (ii) lack of a requirement that private loan servicers use the automatic eligibility check to identify eligible servicemembers; and (iii) lack of routine oversight of SCRA compliance for nonbank private student loan lenders and servicers. The GAO recommended, among other things, that the DOJ require private loan servicers to use the automatic eligibility check to identify eligible borrowers. The report also highlighted an issue with the Department of Education’s new borrower complaint system, which lacks the ability to track SCRA complaints systematically.

    Federal Issues Consumer Finance Servicemembers Student Lending SCRA GAO Department of Education Department of Defense

  • GAO Report Recommends Additional Actions to Help Achieve Dodd-Frank Stress Test Goals

    Federal Issues

    On November 15, the GAO released its report entitled Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals. The report had been requested in September 2014 by House Financial Services Committee Chairman Jeb Hensarling in order to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests. Highlights of the Report can be found here.

    The GAO was asked to review and assess the effectiveness of each of the Fed’s two stress test programs for certain banking institutions. Accordingly, the GAO analyzed Fed rules, guidance, and internal policies and procedures and assessed practices against federal internal control standards and other criteria. The GAO also interviewed Federal Reserve staff and officials at 19 banking institutions. The report sets forth 15 recommendations that the GAO believes will help improve the effectiveness of the Fed’s stress test programs. The recommendations include, among other things, improving disclosures and communications to firms, expanding model risk management, and reconsidering potential consequences of the Fed’s scenario design choices. The GAO has reported that the Fed “generally agreed with the recommendations and highlighted select ongoing and future efforts.”

    In a November 15 press release, House Financial Services Committee Chairman Jeb Hensarling used the GAO report to critique the Fed’s lack of transparency with regard to certain activities under the Dodd-Frank Act. Among other things, Rep. Hensarling stated, “[t]he GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers.” Rep Hensarling cautioned further that “[t]he changes recently proposed by the Federal Reserve to its stress testing process are inadequate,” and the GAO report “demonstrates the absolute need for the new President to designate a Vice-Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve.”

    Federal Issues Consumer Finance Dodd-Frank Federal Reserve GAO Stress Test

  • GAO Finds Continuing Significant Deficiency in CFPB's Internal Controls, Some Progress Made

    Federal Issues

    On November 15, the GAO released is annual review of the CFPB’s financial statements. The GAO report (GAO-17-138R) found: (i) that the CFPB’s financial statements were presented fairly and in accordance with generally accepted accounting principles; (ii) although internal controls could be improved, the CFPB maintained effective internal controls over financial reporting as of September 30, 2016; and (iii) no reportable noncompliance for fiscal year 2016 with provisions of applicable laws, regulations, contracts, and grant agreements the GAO tested. The GAO did identify a continuing significant deficiency in internal controls over accounting for property, equipment, and software, but also noted that the CFPB has made progress in correcting the deficiency, which was first identified in the previous year’s report.

    Commenting on the report, the CFPB stated that “it was pleased to receive an unmodified audit opinion on its fiscal years 2016 and 2015 financial statements.” The CFPB further concurred with the significant deficiency over accounting for its property, equipment, and software that GAO reported, and added that “it will continue to work to enhance its system of internal control and ensure the reliability of CFPB’s financial reporting.”

    Federal Issues Consumer Finance CFPB GAO

  • GAO Report Finds CFPB Meets Requirements for Conducting SBREFA Panels; Panelists Say There's Room for Improvement

    Consumer Finance

    On August 10, the GAO released a report titled “Consumer Financial Protection Bureau: Observations from Small Business Review Panels.” The report summarizes the findings from the GAO’s review of the four Small Business Regulatory Enforcement Fairness Act (SBREFA) panels that resulted in final rulemakings as of April 2016. Specifically, GAO conducted a performance audit from October 2015 through August 2016 to examine the “extent to which CFPB solicited, considered, and incorporated small entity inputs into its rulemakings.” GAO interviewed 57 of the 69 small entity representatives who participated in the SBREFA panels. Although the report concludes that the CFPB completed the statutory requirements for conducting SBREFA panels, it also identifies certain areas where panelists voiced needs for improvement. While panelists voiced a panoply of concerns, including concerns that they did not have adequate time to prepare responses to CFPB information requests, a majority of representatives felt like their views were at least partially considered in the rulemaking process. However, according to the report, only seven of the 57 expressed satisfaction with the CFPB’s final rules.

    CFPB GAO Small Business Regulatory Enforcement Fairness Act Agency Rule-Making & Guidance

  • GAO Releases Report on Mortgage Servicing

    Lending

    On July 25, the GAO released a report titled “Mortgage Servicing: Community Lenders Remain Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules.” At the request of the House Committee on Financial Services, the GAO report outlines and analyzes the effect of the CFPB’s 2013 mortgage-servicing rules and the banking regulators’ implementation of the Basel III framework on credit unions and community banks’ (collectively, community lenders) mortgage servicing activities. Specifically, the GAO report examines (i) community lenders’ participation in the mortgage servicing market, as well as the potential effect of the new mortgage servicing rules on them; (ii) the potential impact that the Basel III framework could have on community lenders’ decisions to hold or sell Mortgage Servicing Rights (MSR); and (iii) regulators’ processes for estimating the impact of the new regulations. 

    Overall, the GAO report suggests that community lenders’ decisions to sell or hold MSRs likely will not be affected by the new capital treatment of MSRs under the Basel III framework because their concentration of MSRs is limited: “Most representatives of community banks said that regulatory changes to the capital treatment of MSRs did not require them to sell MSRs or raise additional capital.” Although officials from two community banks with larger concentrations of MSRs suggested that “the rules would prevent the bank from growing as much as it would like,” the GAO concludes that community lenders’ participation in MSR sales is based on several factors other than MSR capital treatment, including volatility in the value of MSRs, compliance risk, and interest rates and prepayments.

    According to the report, the new mortgage servicing regulations increased compliance costs for community lenders, but have yet to affect adversely their participation in the mortgage servicing market. In fact, the GAO found that, between 2008 and 2015, the share of mortgages serviced by community lenders doubled. The report states that community lenders continue to service mortgage loans held in portfolio or hold MSRs, despite the increase in regulatory requirements and compliance costs, because such activities generate income and help them to maintain strong customer relationships. Regarding profitability, representatives from one credit union noted that “servicing mortgages provides it with the opportunity to develop borrowers into full members with checking and savings accounts and car loans.” Community lenders further highlighted the significance of working directly with customers encountering errors or difficulty during the loss mitigation process: “Representatives at several industry associations and community lenders [told the GAO] that community banks and credit unions preferred to retain MSRs even if they sold the mortgages in the secondary market because they were able to maintain close customer contact should issues arise.” The report recognizes that, for community lenders servicing 5,000 or fewer mortgages, the CFPB’s exemptions for small servicers and creditors were helpful to their businesses and customers. Still, some community lenders reported having to adjust their business practices to manage increased compliance costs, highlighting increases in fees and interest rates, as well as changes to product offerings.

    Pursuant to the Dodd-Frank Act, the CFPB must retrospectively review the effectiveness of its mortgage servicing rules by January 2019. According to the report, as of April 2016, the CFPB’s plans for retrospective review are incomplete because agency officials determined that, among other things, it was “too soon to identify the relevant data and because the agency wanted the flexibility to design the most effective method to analyze the rules.” The report states that, without having finalized a review plan, including outlining its proposed methodologies for seeking public input, the CFPB risks not having sufficient time to complete an effective review. As such, the GAO recommends that the CFPB “complete a plan to identify the outcomes [it] will examine to measure the effects of the regulations, including the specific metrics, baselines, and analytical methods to be used.”

    CFPB Mortgage Servicing Community Banks Basel GAO Loss Mitigation

  • GAO Report Addresses Weaknesses in FDIC Information Security Controls

    Privacy, Cyber Risk & Data Security

    On June 29, the GAO published a report titled “Information Security: FDIC Implemented Controls over Financial Systems, but Further Improvements are Needed.” According to the report, notwithstanding recent efforts to implement effective information security controls to protect sensitive information and systems, the FDIC “continues to have unremediated weaknesses.” After examining the FDIC’s security systems, the GAO found that the FDIC’s user-authorization controls, although improved, remain vulnerable because the corporation failed to (i) implement an effective process for performing periodic reviews of user access rights; (ii) consistently disable inactive accounts; (iii) regularly document authorized modifications to user access; and (iv) identify authorization and recertification deficiencies. The report emphasizes that weaknesses in the user authorization controls “increase the risk that individuals may have greater access to financial data” than necessary. The report further notes that the corporation failed to fully implement, among other things, (i) encryption for all mainframe connections compliant with Federal Information Processing Standards Publications; (ii) effective audit and monitoring controls; (iii) procedures for controlling physical access to facilities; and (iv) management controls of security features for all hardware and software components to control for changes during a system’s life cycle. The GAO recommends that the FDIC improve its information security program by updating and implementing “access control procedures” and implementing additional monitoring of its “critical files.”

    FDIC GAO

  • GAO Report Addresses Borrower Difficulty with Federal Direct Loan Program

    Consumer Finance

    On June 15, the Government Accountability Office (GAO) released a report titled “Federal Student Loans: Education Could Improve Direct Loan Program Customer Service and Oversight.” As part of its study into the Department of Education’s (Education) oversight of the Direct Loan program, GAO reviewed, among other things, Education contracts, monitoring plans, policies, procedures, and guidance related to servicers as well as servicer websites, a sample of communications sent to the borrower, the summary results from Education's 2014 and 2015 customer satisfaction surveys of borrowers, and Education’s quarterly and annual servicer performance reports and annual servicer reviews from fiscal years 2010-2015. In addition, GAO interviewed, among others, CFPB and Education officials, servicers responsible for serving more than 95% of Direct Loan borrowers, and a sampling of 24 Direct Loan borrowers – selected at random from Education data – who were in either (i) repayment; (ii) delinquency (less than 270 days); or (iii) deferment of forbearance. The report highlights borrowers’ limited telephone access to their assigned loan servicers to manage their loans as a key area of concern, noting particular limitations for borrowers on the West Coast assigned to a servicer on the East Coast. The results of Education’s 2014 and 2015 borrower satisfaction surveys revealed similar findings. GAO attributed consumers’ lack of access to servicers to Education’s failure to implement a minimum standard for servicer call center hours: “Education’s lack of a minimum standard for servicer call center hours, and the limited hours currently provided, impede borrowers’ access to customer service that is responsive to their needs and puts them a greater risk of delinquency and default.” The report further notes that Education lacks a systematic approach for capturing borrower complaints, including those received through servicers, and that its performance metrics and compensation structure for servicers, which is based on borrowers’ loan status, “can sometimes hinder Education’s strategic goals of providing superior customer service and ensuring program integrity.”

    Based on its findings, GAO recommends that Education (i) establish a minimum standard for servicer call center hours to allow for improved access to servicers; (ii) ensure its complaint tracking systems sufficiently capture comprehensive and comparable information from servicers regarding the nature and status of borrower complaints; and (iii) analyze and modify its performance metrics and compensation. Generally, Education agreed with GAO’s findings and recommendations, but suggested that its current performance metrics reflect compliance; GAO maintains that they do not.

    Student Lending GAO Department of Education

  • U.S. House Members Seek Information Related to Financial Institution-Fintech Relationship

    Fintech

    On May 24, twelve U.S. congressmen – eleven Republican – sent a letter to the Government Accountability Office (GAO) requesting information on how the U.S. financial system’s regulatory structure affects the relationship between financial firms and fintech companies. This request follows a separate April 18 letter from three Democratic senators requesting that the GAO complete a study on the fintech industry, and comes after a GAO report, which was published in February but publicly released in March, that assessed the U.S. financial system’s regulatory structure, including the impacts of fragmentation and overlap in financial regulation. The most recent letter requests that the GAO supplement its February report by providing information concerning: (i) how the GAO’s findings of fragmentation and overlap in financial regulation “slowed or otherwise harmed innovation, and restricted the ability of financial firms . . . from pursuing new technological ventures”; (ii) how collaboration between financial firms and fintech companies has “helped financial firms streamline processes and become more efficient in delivering products and services”; (iii) “what challenges . . . both financial institutions and fintech companies have with the existing regulatory structure”; and (iv) how federal regulators can “streamline” collaboration between financial firms and fintech ventures, and what best practices U.S. regulators can consider to foster a “culture of collaboration” – such as the “regulatory sandbox” offered by the U.K. Financial Conduct Authority’s Project Innovate.

    U.S. House GAO Fintech

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